Problem 6 (4 points) Mr. Graziano Pellè, the capital budgeting director of Giovi
ID: 2615031 • Letter: P
Question
Problem 6 (4 points) Mr. Graziano Pellè, the capital budgeting director of Giovinco Corporation(GC), is evaluating a five-year project, which will require an initial investment of $98,000 today. The expected end-of-year cash flows of the project are as follows: Year 1 Year 2: Year 3: Year 4 Year 5: $40,000 $29,000 $30,000 $10,000 $11,000 Weighted average cost of capital of this project is 13%, and both target payback and discounted payback is 4 years a. What is the IRR of this project? b. What is the NPV of this project? c. What is discounted payback of this project? d. What is the payback of this project?Explanation / Answer
Cash flow Pv @ 13% Pv of cash flow Cash flow Pv @ 8% Pv of cash flow Year1 40000 0.884955752 35398.23009 Year1 40000 0.925926 37037.04 Year2 29000 0.783146683 22711.25382 Year2 29000 0.857339 24862.83 Year3 30000 0.693050162 20791.50487 Year3 30000 0.793832 23814.97 Year4 10000 0.613318728 6133.187277 Year4 10000 0.73503 7350.299 Year5 11000 0.542759936 5970.359296 Year5 11000 0.680583 7486.415 91004.53535 100551.5 IRR= R1+((NPV1(R2-R1))/((NPV1-NPV2)) = 8+((100551.5-98000))*(13-8)/((100551.5-91004.54)) = 9.252 % IRR= 9.252 % Answer B NPV of project Cash flow Pv @ 13% Pv of cash flow Year1 40000 0.884955752 35398.23009 Year2 29000 0.783146683 22711.25382 Year3 30000 0.693050162 20791.50487 Year4 10000 0.613318728 6133.187277 Year5 11000 0.542759936 5970.359296 Total 91004.53535 Less: Initial investment 98000 NPV -6995.464653 Answer:NPV=(6995.46) Answer C Discounted pay back period Cash flow Pv @ 13% Pv of cash flow Cummulative cash flow Year0 -98000 1 -98000 -98000 Year1 40000 0.884955752 35398.23009 -62601.8 Year2 29000 0.783146683 22711.25382 -39890.5 Year3 30000 0.693050162 20791.50487 -19099 Year4 10000 0.613318728 6133.187277 -12965.8 Year5 11000 0.542759936 5970.359296 -6995.46 Discounted pay back period is when cummulative cash flow is equal to ZERO. i.e, when the initial investment is equal to the sum of discounted cash flow. It is use for calculating how much time the project will use to recover initial investment In the given case project will take more than 5 Years as the cummulative cash flow balance is negative even in 5th year Answer D Pay back period Cash flow Cummulative cash flow Year0 -98000 -98000 Year1 40000 -58000 Year2 29000 -29000 Year3 30000 1000 Year4 10000 11000 Year5 11000 22000 Pay back period= when cummulative cash flow is 0 = 2+29000/30000 = 2.966667 Pay back period=2.966667 Years